answerstohomework2spring2007 - Economics 102 Answers to...

Economics 102 Answers to Homework #2 Spring 2007 1. (a) Setting demand equal to supply, you find that P=5 and Q=5 in equilibrium. Then, Consumer Surplus (CS) = (1/2) * 5 * 5 = $12.5 Producer Surplus (PS) = (1/2) * 5 * 5 = $12.5 Total Surplus (TS) = CS + PS = $25 (b) Plugging P=3 into the demand and supply curves, you can find that consumers want to buy 7 computers and domestic firms want to supply 3 computers at this price. So they will have to import the difference, which is 4 computers. To see who gains and who loses from trade, you need to calculate consumer and producer surplus. Doing this, you can find that CS = $24.5 and PS = $4.5. So, comparing to the answers in part (a), we see that consumers are better off and producers are worse off. Adding CS and PS, we see that TS = $29. So the total surplus in the economy has increased after opening to world trade. (c) At a price of $4, consumers want to buy 6 computers and firms want to sell only 4 computers. Then, we know that they must be importing 2 units. We know from

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